Why Paul Tudor Jones Thinks You Should Focus on Losing Money

In the PBS documentaryTrader, legendary investor Paul Tudor Jones explains that the greatest mistake individual investors make is focusing on pie-in-the-sky, or high return, investment ideas instead of focusing on losing money.

Jones continued, explaining that successful investing is about protecting what you have and that the greatest investors don't always play the best offense, but they always play fantastic defense. Observing Jones' career and past insights gives three helpful tips to help protect your wealth: Mind your fees, have a clear thesis, and be willing to challenge your beliefs.

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1. "I got out of the brokerage business because I felt there was a gross conflict of interest."It is often the simple things that generate the most bang for your buck. In the book Market Wizards, Jones explained that as a broker, "you are charging a client commissions," and even if you lose money "you aren't penalized." It was that conflict of interest that pushed Jones away from his career as a broker and into money management where his fees were more closely tied to performance.

If you are not actively managing your own investments, it makes sense to pay someone to do it for you. However, in many cases fees are unreasonably high. For instance, between advisor fees, trading fees, and mutual fund expenses ("expense ratio"), you could be giving away 3% of your returns each years.

I know it doesn't sound like much, but the average return of the S&P 500since 1928 is roughly 10%. So, assuming a mutual fund can match that, and they rarely do, you would be paying out 30% of your annual return, every year! It isn't sexy, but looking for ways to lower your fees, like investing in ETFs rather than mutual funds, is one of the simplest ways to protect your wealth.

2. Have a clear thesisIf you decide to take a more active role in your investments, like buying individual stocks, then playing defense starts with a strategy.

One example of this comes from Jones' lieutenant, Peter Borish, who spotted the remarkable correlation between stock market trends in 1987 (Black Monday) and 1929 (The Great Depression) that led to Jones winning big when the Dow Jones fell a whopping 23% in one day.

Predicting future stock trends with past trends has always seemed like voodoo to me. Regardless of my opinion, if market trends diverted from 1929 trends, and the other pieces of Jones' thesis were not falling into place, he would have assumed his thesis was incorrect and gotten out. By having a clear thesis, you know exactly why you made an investment to begin with, what mile markers you should see if things are going right -- for instance, growing sales, strengthening subscriber or customer base, creating new and innovative products, etc. -- as well as what might happen if your thesis is wrong, which ultimately helps you play better defense.

3. "Every day I assume every position I have is wrong." Having a thesis is your basis for everything, but it is very easy for cognitive bias -- or our likelihood to gravitate toward information that coincides with our current opinion -- to creep in and impact your decision-making.

In Market Wizards, Jones explained that in 1979 he had one of his worst bets trading cotton futures. Long story short, Jones was so blindly confident in a position -- describing himself as playing a "macho man" with the market -- he ended up losing 60% to 70% of his equity at the time in just a matter of days.

Jones added that the loss taught him an important lesson: "Always maintain your sense of confidence, but keep it in check." Often, some of the most obvious risks are ignored because we are unwilling to look from a different perspective.

Playing defenseThe beauty of investing is the myriad strategies and styles that exist. Jones' approach, which involves heavy trading volumes, a focus on macroeconomics, and using complex investing tools, certainly isn't for everyone. But no matter your approach or investing experience, I think Jones' advice is a great reminder that, while investing can be a fantastic way to build wealth, your first priority should always be to protect what you have.